Coronavirus & India VC: Struggling to work

India, currently in the midst of a six-week lockdown, partially relaxed restrictions at the start of the week. Free movement has been restored in certain locations but Ashish Fafadia does not believe it’s cause for celebration just yet. “I don’t think the cities – known for being a hotbed for virus transmission – will open anytime soon. We can’t miss the agricultural season that is coming up and before the monsoon begins, farmers need to get sowing,” says Fafadia, a partner at Blume Ventures.

As a result, most start-ups are resigned to the fact that little will happen in April. For those that tried to soldier on, there were comical results. “You had to apply for permits if you are producing an essential product and then a permit for employees to come to work. When they did come to work, some were beaten up by vigilantes,” recalls Deepak Shahdadpuri, a managing director at DSG Consumer Partners. “You have to assume zero revenue.”

Many VC investors in seed and early-stage firms remark that some portfolio companies are dealing with liquidity issues in an environment with few financing options. To its credit, the Small Industries Development Bank of India (SIDBI), a state-backed financial institution, has launched a working capital facility but only start-ups with annual revenues of INR100 million ($1.3 million) are eligible.

“The interest rate is ridiculous, the [minimum revenue] qualification is ridiculous,” says Ritu Verma, a managing partner at Ankur Capital, a technology investor specializing in agriculture and healthcare. “In normal situations, such conditions would not be met easily let alone during the current crisis, so I don’t know how that’s going to get deployed.”

It has led to a predictable flight towards quality – well-capitalized start-ups and those that rely on online channels rather than largely inaccessible offline infrastructure are getting the support of venture capital and venture debt investors alike. “Given the uncertainty of the times, we will do deals but we’ll just be extra cautious,” says Nilesh Kothari, a managing partner at Trifecta Capital, a venture debt provider.

Trifecta, which is currently closing its second debt fund, is seeing increased volume of applications for term loans. It’s marked a busier end to the financial year than anticipated. However, Kothari says India-based venture debt providers have a combined annual credit capacity of just $400 million. As a result, VC investors are stepping in with internal bridge rounds or securing external capital for companies running out of gas.

Putting together a new equity funding round is difficult. Early and growth-stage investment in India’s technology space has been rising steadily for several years, reaching $14.6 billion in 2019, up 50% from 2018. But it collapsed from $4 billion in the fourth quarter of last year to $2.3 billion in the first three months of this year. The March total was less than $300 million.

Favorable prospects?

With deal sourcing on hold, activity over the coming months will be driven by existing investors, including some rescue financing. “That could come at the cost of a lower valuation [for the start-up],” says Karthik Prabhakar, an executive director at Chiratae Ventures. “Many companies will start taking corrective measures to make sure they weather the crisis, which means costs will need to be pruned.”

However, DSG’s Shahdadpuri argues such measures are difficult given the level of media scrutiny and an ambiguous directive by the government ordering companies to hold off on retrenchment plans. He expects decisions on right-sizing to be formalized once the lockdown ends. In any case, workers in many industries are not getting paid while companies are unable to pay rent.

A three-month loan moratorium ordered by the Reserve Bank of India has provided temporary relief, but cascading debts will put the financial system under stress. Much depends on when India gets back to work. Investors expect this to happen no earlier than the end of the quarter. Meanwhile, start-ups looking for capital will see a further erosion in valuations, potentially leading to a correction in an ecosystem that was already overheating.

“Compared to public markets, there’s often a transmission gap but valuations will be impacted over the next few months,” predicts Kabir Narang, a partner and co-head of Asia at B Capital Group, adding that he expects market leaders to pursue M&A opportunities as a result. Apart from secondary exits, acquisition by bigger VC-backed start-ups involving equity swaps will be the main liquidity route for investors.

Several VCs compare the situation to India after demonetization, with start-ups that solve unique problems in the current context likely to benefit. The growth potential of online services in healthcare, entertainment and content, as well as financial technology, gaming, and grocery delivery is widely acknowledged. Internet enablers that convince neighborhood shops to go digital and fill missing links in the agriculture supply chain are also expected to find favor.

“Many small and medium merchants, which were already moving from physical to digital, will accelerate their pace of digitization as the economy recovers,” adds B Capital’s Narang.

 

SIDEBAR: Case study - LoveLocal

LoveLocal may have the right business model for the right time. The daily needs platform, which helps users order daily necessities from nearby stores, has seen an explosion in demand from Indians enduring an extended lockdown.

Previously known as m.paani – which means “m.water” in Hindi – the start-up initially sought to increase access to clean drinking water. The pivot to retail store digitization was only finalized last year and a $5.5 million Series A round closed last December. Back then, the team of 22 could not anticipate their app would go viral in the best sense of the word.

Over the past week, LoveLocal has been figuring out how to handle more than 10,000 applications from stores looking to join the platform.  “It’s a race to see how quickly we can set them up. We have stores from towns that Indians have probably never heard of – and about half the requests were referrals from consumers,” says Akansha Hazari, founder of LoveLocal.

While customers order goods on the app, deliveries are fulfilled with the help of six logistics partners. This asset-light model has helped LoveLocal scale faster than larger VC-backed peers like Grofers or BigBasket. A digital onboarding process is in place to process a potential customer base of 11 million consumers and 80,000 retailers.

Hazari anticipates that even if the lockdown is lifted, it will take time for things to normalize, so her team will have longer to work with its userbase. “For example, the primary mode of transportation in Mumbai is the local train [which is crowded]. It’s going to be hard to maintain social distancing,” she says.

Three back-to-back lockdown orders in Mumbai helped convince offline retailers of the importance of a digital storefront. Language integration will be key to wider expansion, especially in the southern states. “Right now, due to supply chain issues, many shops are empty, but we have built an incredible foundation and the habit of buying locally through an app is only going to go up,” Hazari adds.

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• Topics
• South Asia
• Early-stage
• Venture
• Technology
• India
• coronavirus
• covid-19
• TMT
• Blume Ventures
• Ankur Capital
• Chiratae Ventures
• DSG Partners Asia
• Trifecta
• B Capital